Transcript lecture 2 – liberal global economy I

The Liberal Global Economy
(1880-1914)
Lecture notes
The lessons of history
 Three waves of globalization?
1) 1860-1914
- 1914-1945 – disintegration
- 2) 1945-1980
- 3) 1980-2008
- 2008- ?
The international economy integrated
before 1914
Railways integrated national and continental markets, falling
shipping costs opened up trade in new commodities. The
telegraph had a huge impact on communications, making
information transfer much easier.
The emergence of an institutional framework based on the gold
standard brought the world economy together.
Even a rise of national tariffs in continental Europe and in the US,
did not stop the progress of trade, and of capital flows.
It was a period dominated by relative peace, by British economic
dominance and by liberal ideas
GROWTH OF INTERNATIONAL
TRADE
 Between 1840 and 1873 trade in goods expanded at an
average 6% a year.
 In 1873 a FINANCIAL CRISIS broke out in Western Europe.
This was followed by  DEPRESSION OF THE 1880S.
After 1894 prices start to pick up again. Rise in protectionism.
 In the two decades before WW1, despite protectionism,
trade accelerated again and it rose by about 4.5% a year
between 1903 and 1913.
FREE TRADE AND PROTECTIONISM
 Theoretical advantages of Free Trade exposed by the
Classical economists.
 Adam Smith gains from specialisation and the
division of labour.
 Ricardo  comparative advantage.
 In practice however free trade policies were an
exception and protectionism, in various forms
and measures, the norm: see political factors,
interest group pressures, cartels, international rivalry.
Brief history of trade policies.
 Trade policies in the 18c and early 19c were dominated
by mercantilism, a form of protectionism.
 Theories were developed to justify protectionism. The
ideas of Fredrick List were very influential in
Germany and in other industrialising countries as well.
He advocated that industrialising countries needed to
protect their infant industries from British competition
by IMPORT SUBSTITUTION.
Brief history of trade policies
 In the early part of the 19th century Britain was by far the
most liberal country in Europe.
However it had its own protectionist arrangement,
particularly in agriculture, with the Corn Laws, i.e.
tariffs on imported grain - and the Navigation Acts
which were measures designed to boost British shipping
against foreign competition.
 1846 - repeal of the Corn Laws by the British
Parliament. This was followed by the repeal of the
Navigation Act.
Brief history of trade policies
 1860: Cobden-Chevalier Treaty. Britain removed
all tariffs on imports of French goods. France removed
its prohibitionist laws on the importation of British
textiles and reduced its tariff to an average ad valorem
level of 15%.
 The Treaty was very important since at the time France
and Britain were the linchpin of international trade. The
Treaty included a most favoured nation clause.
Brief history of trade policies
 1870s and after  a massive increase of
competition from overseas imports.
Large-scale imports of cereals and grain are made
possible by:
 Falls in ocean freight
 extension of railways in the US as well as Argentina,
Australia, Canada, Russia. This brought new areas
into cultivation since it opened up new markets.
Brief history of trade policies
 1879  protectionist tariff in Germany. 1892 - the
Meline tariff, an even more protectionist tariff in
France particularly in agricultural goods.
 Most other countries in continental Europe follow the
protectionist wave, i.e. Italy, the Hapsburg Empire,
Russia etc.
Only a clutch of countries remains committed to free
trade: Great Britain, The Netherlands,
Denmark, and Belgium.
The US and trade policy
 The US prior to the Civil War, under the influence of
the southern planter aristocracy had followed a low
tariff policy.
The South depended on the export of cotton and was
not interested in protectionism.
 After the Civil War /1861-1865/ the prevalent
interest shaping US policy were the manufacturing
industries in the North and the Midwest, and the
nation became very protectionist.
REGIONAL DISTRIBUTION OF WORLD
TRADE
 In 1912-3 Europe was still by far the most important
originator of world trade, accounting for 62% of world
exports. Much of European export trade was intraEuropean trade.
 Germany had become the most important world supplier of
manufactured goods and most of its trade was with other
European countries.
 Composition of trade. The more industrialised countries
exported a large share of manufactured goods and imported a
large share of primary goods.
The reverse was true for the less developed countries.
Britain and world trade
 Britain ran a deficit in trade of visible goods
with most industrial countries, comprising mostly
manufactured goods.
It also had a deficit with most non- industrialised
countries, except a few, among which India was by
far the most important.
 On the other side Britain more than compensated
for this deficit by a surplus in invisible exports
with the rest of the world, i.e. shipping services,
banking, insurance etc.
THE GOLD STANDARD
 Britain adopted the Gold Standard after the Napoleonic wars.
 This meant that gold was the base of the entire economy's money supply. The
Currency was convertible into gold.
 Because of the key role played by Britain in the world economy the
system of the Gold Standard attracted new countries in the course of the 19th
c. Germany adopted the gold mark after its victory over France in 1870-1 and
the creation of the German Empire. The USA moved to Gold in 1900, but
informally it was already on gold from 1877.
 Russia moved to Gold in 1897 (the same year as Japan). Austria had
moved to gold in 1892.
 Some countries like France (and briefly also the US after 1879)
attempted to link their currencies to silver, but as the price of silver fell, they
found their currencies losing value and had to revert to gold, by the 1880s.
THE GOLD STANDARD: conditions
Requirements for each country:
1 - its currency needs to have a fixed gold
contents and is traded at a par value
2 - gold is bought and sold in unlimited
quantities and a fixed price
3 - no restrictions on imports and exports of
gold
4 - any banknote is exchanged into gold (and
into any other currency) on demand = full
convertibility
THE GOLD STANDARD AT WORK
The amount of gold that a country’s Central Bank possessed
determined the amount of credit that it could extend in
forms of banknotes and deposits, held by other banks,
i.e. the money supply. Fluctuations in the money
supply determined fluctuations in prices. Ex. Rise
in money supply pushed prices up.
The system was self-correcting. The movement of gold in or
out of the country – as a function of the balance of
payments surplus or deficit - caused fluctuations in the
money supply and in prices.
An outflow of gold would generate a fall in the money
supply. Interest rates would be hiked up, to stop it.
Higher interest rates and less gold would lead to a fall in
prices of traded goods and thus restore competitive
conditions.
ADVANTAGES OF THE GOLD
STANDARD:
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Fixed exchange rate – no risk of competitive
devaluation.
Gold anchor, guarantee against price inflation.
Reliable transactions. Provides multilateral
clearing system of convertible currencies. Money
earned in one place could be spent and invested in
another country.
DISADVANTAGES - Crude adjustment
mechanisms for the poorer countries (if hit by a
crisis) and disinflationary/deflationary bias.
THE GOLD STANDARD
 Shared common assumptions.
 An orthodox economic policy prepared to sacrifice
domestic economic concerns to international stability.
 Economic policy was conducted with one single tool, the
discount rate, a fairly crude mechanism of adjustment.
 Commitment to a strong currency, tied to gold –
maintaining a positive balance of payments and a
balanced budget.
 A good level of international co-operation based on a
concerted approach by the main powers.
International Investment
 The export of capital was not a new phenomenon, but
by the latter part of the 19th c. it reached new
heights.
 Sources – from foreign earnings, both from trade,
from previous foreign investment.
 Who carried out? Banks, governments, companies.
 How? By subscribing government, or governmentbacked bonds. Or by acquiring shares in business.
 Why? Expectation of a higher rate of return than was
available domestically. This was not always realised,
however.
International Investment
To sustain an export of capital, and to become a net
exporter a country had to have generated a
surplus in the balance on current account.
This happened in two ways:
 Either from the trade surplus: France and
Germany. Or from invisible surpluses, i.e.
Shipping, banking, insurance, interest earned on
previous capital exports, see Britain.
Capital movements pre-1914 and today:
comparison
 A larger share of resources was transferred. Between
1870 and 1913 capital exports from Britain amounted
to an average of 4.6% of Britain’s GDP. At its peak the
share was nearly 10% of GDP in some years.
Also net capital imports were comparatively higher, for
example some developing countries such as Argentina
ran current account deficits of 18.7%.
Today capital flows are a two way affair, countries both
export and import capital, so that net positions are
smaller.
While before 1914 richer countries were net exporters,
today they tend to be net importers.
Capital movements pre-1914 and today:
comparison
 Pre-1914 less developed, or developing countries
were large borrowers of foreign capital.
Today most capital transactions are a flow between
the more industrialised countries, rather than to
developing countries. Africa in 1999 received just 1%
of all FDI.
 Pre 1914 foreign investments went mainly into
transportation, mining, or into railways and
government bonds.
Today a large amount of capital is in short term
assets, while long term investment are much more
varied, with multinational corporations investing in
manufacturing, services etc.
Migratory flows before 1914 and today
 They were bigger than today. Apart from the 60
million leaving Europe, there were 10 million
voluntarily leaving Russia for Central Asia and
Siberia. And 12 million Chinese and 6 million
Japanese emigrating to East and South Asia.
 The impact of migration was much bigger than today
also on the receiving countries. In 1911 the foreign
born were 14.7% of the population of the US and
22% of Canada’s. In 1990 in the US it was 8.6%.
 Today most countries have tight immigration
controls. The movement of unskilled labour is
tightly controlled.
Class Work
Additional Bibliography
• Dani Rodrik, The Globalization Paradox, cap. 1 e 2.
 “The global capitalism of the late nineteenth and early
twentieth centuries came close to the classical ideal”.
Briefly describe why.
 Give brief definitions of the following:
Infant industry protection
 Comparative advantage
 Import Substitution
In what ways was Britain at the centre of the global
economy in this period?
What was the Gold Standard and how did it work?
What was the intellectual case for free trade?
Who benefited most from international investment
flows and international migration flows?
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Controversies over the gold standard. Who were its supporters
and who were its opponents and what were their arguments?
Controversies over free trade. Who were its supporters and
who were its opponents? And what were their arguments?